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Starbucks has risen by almost 80% in the last year, but this innovative juggernaut has more room to run over the long term beyond peers, such as Dunkin' Brands and McDonald's.

Starbucks(NASDAQ:SBUX) is having an amazing year and the stock is steaming hot after rising by nearly 80% in the last 12 months. After such a steep rise, investors may be wondering if it's still a good time to invest in the coffee powerhouse or if the best times are already behind the company. Fortunately, Starbucks still offers a lot of growth potential in the menu.

Caffeinated performance Starbucks delivered a 13% increase in revenue during the last quarter; this was fueled by the opening of 588 new stores and a healthy increase of 7% in global comparable store sales. The company is aggressively expanding its store count, and this is not hurting sales at existing locations, so demand remains strong and Starbucks is clearly moving in the right direction by betting on growth.

Profit margins are on the rise too, consolidated operating margin expanded 220 basis points to 17.6% during the quarter, and the company generated a big increase of 37% in earnings per share to $0.63. Management is expecting to open approximately 1,500 new stores in fiscal 2014 which in combination with comparable store sales growth in the mid single digits should produce revenue growth above 10% in the next year according to guidance.

This performance becomes even more impressive when compared to other companies in the industry which are feeling the competitive pressure and suffering from a weak consumer environment. McDonald´s(NYSE:MCD) reported a much slower increase of 2% in revenues during the quarter, while comparable store sales increased at an uninspiring 0.9% on a global basis.

McDonald´s is having its own problems as consumers around the world continue paying more attention to the nutritional qualities of the food and drinks they consume. The fast food giant is also bigger with more than 34,500 restaurants versus 19,767 global Starbucks stores as of the end of the last quarter and this means a more saturated market for MacDonald´s

Still, the difference in growth is quite remarkable, to sum it up in a number: while McDonald´s increased dividends by 5% in the quarter, Starbucks hiked distributions by a whopping 24%.

Even a smaller competitor with more room for store openings like Dunkin' Brands(NASDAQ:DNKN) is being left behind by Starbucks. The company has nearly 7,500 Dunkin' Donuts restaurants in the U.S, and management believes it has room for 15,000 locations in the country. Yet Dunkin' Donuts reported comparable store sales growth of 4.2% in the U.S. during the last quarter versus an 8% increase in comparable store sales for Starbucks in the U.S. for the same period.

On a company wide basis, including both Dunkin' Donuts and Baskin Robbins on a global scale, Dunkin' Brands produced revenue growth of 8.5% to $186.3 million for the third quarter of the year versus an increase of 13% to $3.8 billion for Starbucks.

Growth opportunitiesStarbucks is firing on all cylinders lately, and there is plenty more where that growth came from. To begin with, the company is planning to expand its store base in China to 1,500 locations by 2015 and it still has plenty of room for new openings in Asia and Latin America.

In addition to that, Starbucks has recently opened its first redesigned Teavana Fine Tea and Tea Bar store in New York City's Upper East Side. CEO Howard Shultz said during the earnings press conference that tea is "a $90 billion global industry that is right for innovation" and Starbucks has the capabilities, infrastructure and brand power to benefit materially from that opportunity, especially considering consumption habits in countries like China and India.

As of the end of the last quarter, Starbucks had rolled out La Boulange products in nearly 3,300 stores, or about 16% of its total store base. Improved food offerings have been a strong driver of comparable sales growth in the locations were they have been introduced, so it looks like high quality pastry is going to become an area for tasty growth over the coming quarters.

Schultz also said during the press conference that the company has already exceeded the growth plans it initially laid out for Evolution Fresh. Starbucks has recently opened its new juicery in California aimed at quadrupling capacity to gain a bigger share of the super premium juice category, a market opportunity which Howard Shultz estimates to be worth nearly $1.6 billion.

Starbucks is definitively one of the most innovative players in its industry; the company is developing new distribution and expanding into the packaged food segment. The company is also a pioneer when it comes to leveraging technology and implementing innovative marketing campaigns to increase customer loyalty and engagement. Innovation is the ultimate growth driver for Starbucks, and the company has plenty of interesting initiatives in the pipeline.

Bottom line Trading at a P/E ratio near 39, Starbucks is clearly priced for growth, and investors need to consider that this valuation makes the stock vulnerable to any disappointment that may arise in the short term. On the other hand, Starbucks is a premium company which deserves a premium valuation, and this innovative powerhouse has more upside potential over the long term.

Author

Andres Cardenal, CFA is a tenacious researcher of the best investment opportunities around the world. Andres is an economist and CFA Charterholder living in Buenos Aires, Argentina. Naturally flavored.
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